Revenue at Microsoft's Azure cloud-computing unit jumped 40 per cent in the quarter.Gonzalo Fuentes/Reuters
Microsoft’s MSFT-T on Wednesday forecast that sales at its Azure cloud business would beat Wall Street estimates, and the software giant unveiled plans for 2026 capital spending of US$190-billion, which also surpassed expectations.
After the forecast, Microsoft shares were even with their close, rebounding from a fall of more than 2 per cent in extended trading after quarterly results showed only a modest increase in cloud revenue growth. Rival Google reported a stronger rise in cloud growth and Alphabet shares surged more than 4 per cent after hours.
Big Tech’s race for AI dominance is intensifying, with investors rewarding companies that deliver standout growth. Some investors are growing more concerned Microsoft’s reliance on partners such as OpenAI may no longer guarantee an edge. Many also worry that Microsoft’s large business customers have been slow to adopt its Copilot 365 assistant.
Microsoft said it expects revenue for its Azure and other cloud services business to grow between 39 per cent and 40 per cent, in constant currency, in the fiscal fourth quarter, which would beat the estimate of 36.7 per cent growth from Visible Alpha.
Revenue at the unit rose 40 per cent in the fiscal third quarter, quicker than the 39 per cent growth in the previous three months, but in line with a consensus estimate.
In contrast, smaller rival Google Cloud posted a 63 per cent rise in revenue that blew past estimates for a 50.1 per cent growth, albeit on what analysts believe is a smaller baseline of sales.
Microsoft forecast fiscal fourth-quarter revenue of between US$86.7-billion and US$87.8-billion, largely in line with an average LSEG estimate.
Microsoft said it expects to spend US$190-billion this calendar year, which according to data from Visible Alpha far exceeds analyst forecasts for spending of more than US$150-billion. On a conference call with analysts, Chief Financial Officer Amy Hood said US$25-billion of the spending was because of rising costs of components such as chips.
“We remain confident in the return on these investments given higher demand signals and increasing product usage,” Hood said during the call.
OpenAI breaks off Microsoft exclusivity ahead of ChatGPT maker’s planned IPO
Users of the US$30 per month M365 Copilot AI assistant rose to 20 million from 15 million disclosed in January, said Jonathan Neilson, Microsoft’s vice president of investor relations.
“The fact that we added five million seats in one quarter is certainly a message that we feel very, very good about,” Neilson said.
While that is a small number of users compared to Microsoft’s overall user base, on the conference call with analysts, CEO Satya Nadella said that customers who use Copilot use it as much on a weekly basis as they do Outlook.
Microsoft also said it has an AI run rate of US$37-billion, measuring how much revenue it expects to come from selling infrastructure to third parties such as OpenAI, plus sales of its own AI offerings over the next year.
Microsoft said capital expenditures in the fiscal third quarter rose 49 per cent from a year earlier to US$31.9-billion, but were down from US$37.5-billion in the second quarter. Wall Street had expected US$34.90-billion in quarterly capital spending, according to Visible Alpha.
But the pullback in spending will end in the current fiscal fourth quarter, with Hood estimating US$40-billion in capital spending, with US$5-billion of that driven by higher chip prices. Analysts had estimated US$37.48-billion, according to Visible Alpha.
To sharpen its competitive edge, Microsoft has added Anthropic’s technology to its cloud service and products like Copilot amid rising demand for the Claude creator’s models.
Earlier this week, Microsoft also overhauled its OpenAI deal to lock in its 20 per cent cut of the startup’s revenue through 2030 regardless of whether it achieves technological breakthroughs.
But the new arrangement also strips Microsoft of exclusive rights to resell OpenAI’s products on its cloud. Competition in this area has been heating up from Alphabet and Amazon, the e-commerce giant that has already started offering OpenAI’s latest models and Codex coding tool on its cloud.
The move could free up cloud capacity for Microsoft, which has blamed shortages for holding back revenue growth and used that to argue for its massive spending.
Funding those outlays has, however, forced companies to look for ways to cut costs. Microsoft earlier this month rolled out its first employee buyout program in more than five decades.
Amazon and Meta have also announced job cuts affecting thousands of employees.